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Merck Allocates $500 Million to Venture Capital

Biotech investments could restock the drugmaker’s much-depleted pipeline, if more successful than previous efforts.

Big pharmaceutical companies are struggling to refill emptying drug pipelines and fend off competition from off-shore generic manufacturers. That has prompted one, Merck & Co., to dig into an old bag of tricks: venture capital aimed at biotech research.

Merck has allocated $500 million in venture capital to two funds to develop early-stage life sciences technology and businesses. Its goal is to source life sciences research, domestic and global, in its early stage and build strategic and permanent relationships with the companies and their science.

Last month Merck announced a $250 million investment through a fund of funds called Merck Research Venture Fund to partner with VC firms that invest in early stage life science companies. The fund has already partnered with one unidentified venture fund that invests in biotech, though the amount allocated is unknown. As a limited partner, the fund of funds will offer up Merck’s scientists as advisors to the portfolio companies, and provide Merck’s business development staff an inside track in negotiations to acquire the rights to a product or the product outright. Longer term, Merck plans to make direct investments in biotech companies.

Merck last spring launched a more conventional VC fund that invests in companies themselves. Its Global Health Innovation Fund, run by Bill Taranto, a former Johnson & Johnson executive in charge of global strategy and alliances, plans to invest another $250 million in companies specializing in diagnostics and related devices, information technology and health management.

These efforts would take Merck well beyond its traditional pharmaceuticals business. And just in time, perhaps, as profits have suffered of late. For the second quarter of 2011, it earned $2.02 billion on sales of $12.2 billion, down 25 percent from $2.7 billion on sales of $11.3 billion a year earlier. To be sure, revenues aren’t immediately threatened by a major drug going off patent. But investors worry about Merck’s pipeline and how its previous involvement with promising ideas have turned out.

In 2001, Merck paid $620 million to acquire Rosetta Inpharmatics, a Kirkland, Washington company that employed novel drug screening software to analyze drug interaction and help design new drugs. The deal signaled Merck’s entry into the brave new world of gene expression and bioinformatics and was heralded as means of bringing new ideas into drug-company labs. As part of the deal, Rosetta founder Stephen Friend joined Merck as a vice president of Merck Research Labs. But in 2008 Merck shut down Rosetta’s labs and offices in Washington to cut costs, Friend left to form Sage Bionetworks, a not-for-profit research organization using genomic screening to facilitate drug design, and Rosetta’s remaining assets were sold off to Microsoft. Sage has thrived by developing a platform on which researchers and scientists can share data to develop drugs faster and more cost-effectively.

Merck’s more recent efforts to exploit new ideas also seem to have faltered. An interim analysis for one of Merck’s new development programs has been delayed by several months. Originally slated for late 2011, Merck now says the second interim analysis of IMPROVE-IT, which is testing its closely-watched cholesterol drug Vytorin as a tonic for cardio risks, will be pushed back to early 2012. And in a highly publicized contest with Abbott Pharmaceuticals and Vertex Pharmaceuticals to offer a breakthrough drug in the treatment of hepatitis C, Merck’s Vicrelis is in a virtual standoff with Vertex’s Incivek and Abbott’s combination therapy, as none of the three products has demonstrated any significant advantage over the others.

In a healthcare financing environment that is starved for returns and capital, Merck’s venture capital dollars will be more than welcome. But whether the results will yield products and services that create shareholder value is open to debate. Yes, corporate venturing always gets good press, seen as it is as entrepreneurial and forward thinking. But the best entrepreneurs are never comfortable developing their ideas under the watchful eye of big corporations, however helpful they may be in terms of resources, as the example of Rosetta shows. It may be too early to pass judgment on Merck’s venture capital initiatives, but past performance offers cause for skepticism.

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